Inflation climbs down like a snail But high food prices mean pockets remain squeezed
NOTWITH STANDING THE OUTCOME of last week’s meeting of the Monetary Policy Committee (MPC) on Friday, it is still in the records that the consumer price inflation rate, which printed at 17.01 percent year on year as of August 2021, at the moment is above interest rate, as well as the CBN’s upper band target of 9 percent. Hence, Nigerians are still lamenting without explanations as to why consumer food prices continue to accelerate and squeeze pockets, despite the announcement by the National Bureau of Statistics (NBS) that the headline inflation rate is declining.
Synching the above narrative, analysts as well as stakeholders, are already lamenting the looming effect of the high inflation rate, increase in electricity tariff, increase in petroleum product prices, which are high for the average Nigerian; coupled with the FX shortage in the currency market, which has led to the Naira trading above N560 for the greenback in the unofficial market. So, despite the disinflation in the economy, pockets of Nigerians are still squeezed in reality.
Nevertheless, the recent chain of events around the economy, which includes the weakening of the local currency; its contribution to weakening the purchasing power of the Nigerian Naira - where alternative currencies have taken the place of the domestic unit of exchange in the markets, especially the parallel market; as well as the coronavirus pandemic, and the insecurity challenge, causing supply chain disruption from staple to table, can be said to be another factor.
And as commodity prices rise faster than wages, real incomes of consumers or labour face a massive fall in real terms. Thus, higher inflation poses a risk to households with lower income.
According to the recent consumer price inflation report published by the National Bureau of Statistics, headline inflation rate rose to 17.01 percent year on year, and 37 basis points lower than July 2021 inflation, which printed at 17.38 percent, implying that the rate of change in prices continued to subside in August 2021. On a month on month basis, the broad CPI increased by 1.02 percent, faster than the 0.93 percent month on month increase in July 2021. Also, the inflation report confirmed an observation of price increase across all components of the index with the highest increases expectedly recorded in food prices.
However, the Abuja-based statistics office has noted that the decline in the headline figure for the fifth consecutive month was precipitated by 31 basis points and 73 basis points year on year decline in food inflation and core inflation rate to 20.3 percent and 13.4 percent, respectively, supported largely by a high base-year effect from 2020. Observably, moderation in food prices was driven by a high base for the food sub-index as food prices remained elevated due to prevailing supply-side challenges, particularly insecurity. Overall, food prices continue to come under pressure from unabating security challenges in food-producing northern states, as well as the Middle-belt. In addition, inconsistency in climate conditions continues to pose more concerns for agriculture. Notably, imported food price inflation has been relatively stable when we consider the challenges with accessing FX over the past 18 months. Some importers have tapped the parallel market so as to maintain their supply of goods to the domestic market. Further, analysts at FBN Quest Capital Research have seen UN estimates that global food price inflation is running close to 40 percent, year on year.
The core inflation sub-index drifted southwards by 31 basis points year on year to 13.41 percent, reflecting slightly reduced but elevated pressure on shoes and other footwear, textile products, transportation and vehicle spare parts and pharmaceutical products components of the inflation basket. Remarkably, core sub-index faced some pressures from clothing and footwear, which saw an increase of 14.38 percent year on year and 1.12 percent month on month, possibly impacted by the halting of sales of FX to BDCs, which are a major source of FX for clothing imports despite the fact that textile and clothing items are on CBN’s FX restriction list.
Looking closer at the falling inflation rate, but rising commodities
prices, economic analysts at Afrinvest Securities Research, in a reaction to the inflation numbers said:
“We attribute the sharp increase in the m/m imported food index to the recent high inflation rate in advanced economies and the pass-through effect of Naira devaluation. We link the sharp increase in the domestic food index to supply shortage from the agrarian communities and high logistic costs. Meanwhile, we attribute the pressure on Housing, Water, Electricity, Gas & Other fuels, and Transport to the increase in the prices of energy items save for PMS and Electricity that are still subsidized.”
United Capital research analysts assert that inflationary pressures will maintain a downward trend despite persistent price pressures.
“First, while the harvest season is expected to start in September with the early harvests, we expect recent climate concerns coupled with insecurity challenges keeping farmers from their farms to inhibit food supply. Furthermore, recent FX pressure in the parallel market which has seen the US dollar exchanging for a record N562 at the parallel market is expected to begin to reflect in the price environment in subsequent months as several widely consumed items are on CBN’s FX restriction list while several consumer goods companies continue to highlight inability to source all their FX needs via official channels. In addition, pushback from labour unions is likely to forestall any increment in electricity tariffs at least through 2021.”
Analysing price movements across the states where the NBS also tracked inflation data, the results show that for the third month in succession the highest rate in August was recorded in Kogi State, at 23.4 percent with the lowest rate being 14.6 percent reported in Kwara State. Kogi is also the state with the highest food price inflation. Household baskets vary across states due to different consumption patterns.
Some analysts had, before this time, noted that the persistent disinflation was likely to provide some succour to the Monetary Policy Committee (MPC) members and drive some major factors in their rate decision. This may have helped to sustain the perception that a rate hike would not be needed to rein in inflation as the CBN governor is not alone in anticipating a positive harvest effect on price levels.
Meanwhile, economic experts have projected a further deceleration in the headline rate albeit at a slower pace, while noting that there are key price pressure points in the economy. The prediction of a slower disinflation is hinged on permeation of current FX pressures which is expected to gradually weigh on the base effect.